Confidence falls as U.S. payroll tax rise hits

Confidence among American households unexpectedly fell to a one-year low in January, as higher payroll taxes create a risk that the biggest part of the economy will slow in early 2013.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment dropped to 71.3, the lowest since December 2011, from 72.9 the prior month. The gauge was projected to rise to 75, according to the median forecast in a Bloomberg survey.

A boost to confidence in the second half of 2012 from a pickup in job growth has evaporated, just as lawmakers in Washington remain divided about raising the debt ceiling and cutting government spending. Discounters including Target Corp. are trying to lure shoppers with year-round promotions as households brace for smaller paychecks due to a two percentage- point increase in payroll taxes.

“The economy is growing at a tepid rate, employment is growing at a tepid rate and consumer confidence is measly,” said Kevin Harris, chief economist at Informa Global Markets in New York, whose projection of 72 for the Michigan index was closest in the Bloomberg survey. “Everybody took a two percentage-point pay cut and that is not going to help.”

Stocks closed at a five-year high as investors weighed prospects for a short-term increase in the debt ceiling. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,485.98 at the close in New York.

State Employment

Another report today showed that New York and New Jersey led payroll gains in December as the states rebounded from superstorm Sandy. Of the 27 states showing stronger employment, New York was at the top of the pack with a 35,100 increase, followed by New Jersey with 30,200, according to the Labor Department.

The dominance of the two states indicates that the rebound from the storm that crippled the Northeast in late October and early November had some effect on December U.S. payroll gains. Job growth averaged 160,000 a month in the second half of 2012, up from 146,000 in the first six months.

Elsewhere, China’s economic growth accelerated for the first time in two years as government efforts to revive demand drove a rebound in industrial output, retail sales and the housing market.

Estimates for the Michigan confidence measure ranged from 70 to 84, according to the Bloomberg survey. The index averaged 64.2 during the last recession and 89 in the five years before the economic slump that began in December 2007 and ended in June 2009.